The Foundations of Free Enterprise
by Allen, Armstrong, and Wolken
America’s Free Enterprise System Today
Today’s American economy features a mixture of traditions, commands, and markets. Though it is largely a market economy, there are important differences between the pure free enterprise system and our actual economic system. For example, government’s role in our American system goes far beyond that of a rule-maker and umpire. Governmental decisions at all levels influence answers to the “what to produce,” “how to produce,” and “how to divide” questions. Large government purchases of goods and services influence what is produced. Rules and regulations of various agencies influence how things will be produced and tend to set limits on private rights to property. Taxes and welfare programs influence how the economic pie is divided. Clearly, government actions in today’s American economy go far beyond the limited responsibilities assigned to government in a pure free enterprise system.
Given the strong allegiance most Americans pledge to free enterprise, how can we explain the expansion of government into the economic realm? There are three important contributing factors. First of all, it must be remembered that for most of us support of free enterprise is a simple, almost automatic, act of patriotism. Commitment to free enterprise is something we profess with very little thought. Belief in the idea comes so naturally that few of us ever have felt it necessary to understand the defining features of a free enterprise system. Given this state of affairs, it is not at all surprising that many people who call themselves strong supporters of free enterprise see nothing wrong with encouraging government actions to “make the system work better.” Lacking any grounding in the essentials of the system, they cannot know that by its very nature a free enterprise system is self-regulating and that in the long run governmental actions have potential to “make matters worse” by interfering with the natural communication taking place between producers and consumers in the market place.
Encouragement of government involvement results from decisions by well-intentioned people who sincerely believe themselves to be acting in the best interests of the free enterprise system. Milton Friedman has spoken eloquently to this point:
“The great movement toward government has not come about as a result of people with evil intentions trying to do evil. The growth of government has come about because of good people trying to do good. But the method by which they have tried to do good has been basically flawed. They have tried to do good with other people’s money. Doing good with other people’s money has two basic flaws. In the first place, you never spend anybody else’s money as carefully as you spend your own. So a large fraction of that money is inevitably wasted. In the second place, and equally important, you cannot do good with other people’s money unless you first get the money away from them. So that force — sending a policeman to take the money from somebody’s pocket — is fundamentally at the basis of the philosophy of the welfare state.” (See End Note #1.)
Economic ignorance has resulted in a tendency to look at individual economic problems in isolation. That is, they have not been viewed in terms of their relationship to our entire economic system. Consequently, governmental programs have been designed to deal with highly specific individual problems. This has led to conflicting programs. For example, the government warns us of the dangers of smoking cigarettes while at the same time subsidizing tobacco growers.
But the problem goes much further than this. Each program, in itself, has little effect on our economic system. But over the years, as we have continued to add so-called small programs, their combined impact has had a profound effect on the performance of our economy. Because we do not understand how our economic system works, we have failed to realize the connection between prosperity and the way our system is organized. Prosperity and freedom go hand in hand.
A second reason for the expanded role of government has been the growing popularity of the view that the individual is not the best judge of what is best for him. Further, many believe that man is not responsible for his own behavior. Instead, society is responsible. It naturally follows then that we must be protected from ourselves. Therefore, society must be regulated in order to meet some higher social goats that will serve the masses. Many in government share this view, and as a result many government programs have been established in recent years in the name of “the public interest.”
We should emphasize that the conflict here is not between “doing good” and “doing bad.” The conflict is over who is the best judge of which actions are good and which ones are bad. In a free enterprise system these decisions are made by individuals within a general legal framework. In a command system these decisions are made by government. One of the major problems we face is determining what is the right mix, or balance, of these two systems.
A third reason for an enlarged role for government stems from the fact that the free enterprise system is not perfect. Even in its pure form it has some flaws. In some circumstances markets are-unable to work perfectly. Many feel that freely operating markets will not provide enough public goods (parks, highways, education, defense, and so forth) and will provide too much of undesirable things such as polluted air and water. Also, many feel that free markets will not provide a fair distribution of income. Thus, we have turned to government to correct these market imperfections. While this may be a legitimate role for government, we must not overlook the fact that government, too, is imperfect. We must be careful to determine not only the benefits, but also the costs, of government programs designed to correct problems in the market place. Do the benefits outweigh the costs?
We make these kinds of judgments every day. Our society and economic system reflect these decisions. That is why it is so important that we make informed judgments. The study of economics and the basic foundations of alternative economic systems will be a great help in doing this. So let us now turn to some criteria by which we can judge the performance of various economic systems.